A worker welds at the construction site of a bridge in Hanoi, Vietnam, Nov. 1. Vietnam's economic growth target is 5.5 percent next year, similar to the expected rate of expansion in 2012, the government said.

VINH-O COMMUNE, VIETNAM — The Ben Hai river running through this small mountain village in central Vietnam marks the 17th parallel, what was the dividing line between North and South Vietnam prior to the exit of US troops and the communist victory in 1975.

It is a historic but neglected part of Vietnam – a world apart from the bustling capital Hanoi, with cell phone coverage disappearing on the snaking road up to the village as the early morning drizzle falls over the steep and green foliage-laden slopes on either side.

Most of the people living along the rural river area are Van Kieu, one of 54 officially-recognized ethnic groups in Vietnam, where rising income levels for urban Vietnamese have not been matched by improved living standards in some isolated rural areas where minorities live.

Despite Vietnam's "tiger" economy years "upland farmers [including and in particular the minority ethnic groups of the Central Highlands] have been left behind," says Roger Montgomery of the London School of Economics.

The Vietnamese government has repeatedly said that it wants to boost living standards in such areas, part of its overall ambition to achieve a modern industrial economy by 2020. But its ability to live up to these pledges are being constrained by bigger challenges facing the country and the ruling Communist Party, raising questions about the direction of Vietnam’s economy.

Several recent corruption scandals and multibillion dollar losses incurred by mismanaged, behemoth state-owned enterprises have belied hidden fault lines in Vietnam's economy which could in turn lead to reduced growth.

"The veneer of short-term high growth rates made it hard for the government to move forward on reforms. Why fix something that doesn't appear to be broken? Unfortunately, when growth in the region and major international markets such as Europe, the US, and China slowed, Vietnam's economic weaknesses were exposed," says Ernest Bower, southeast Asia analyst at the Center for Strategic and International Studies.

While Vietnam grew by around 7 percent on average during the decade up to 2010 – lifting Vietnam to World Bank “middle-income” status and pulling in big-ticket investors such as Boeing and Intel – growth for next year is expected to dip to around 5.5 percent.

In Vinh-O, needs are basic, but vital support could be hindered by that dip, especially if slower growth means spending cutbacks or a nervous ruling party stalling on economic reforms. “We need better irrigation canals, better water systems. Eighty-three percent of the people in this area are poor,” says Nguyen Thi Hai, deputy chair of the local People's Committee of the ruling Communist Party of Vietnam.

This summer, the country's central bank conceded that bad debts amounted to as much as 10 percent of all bank loans. And analysts speculate that the real number could be at least twice that.

To compare, total nonperforming loans at four of China's biggest banks came to just 1 percent of all loans last year, meaning Vietnam's bad loans are likely closer to figures for Spain, where around 10 percent of bank loans are not being repaid according to the country's Central Bank.

Rare apology by the ruling party

With the country under such an economic pall, Prime Minister Nguyen Tan Dung recently made a rare apology for problems at state-owned enterprises – which make up 35 percent of the Vietnamese economy. The prime minister was on the end of a public rebuke from rival Communist Party bigwigs, leaving the party looking divided over the troubles facing the Vietnamese economy and the effect these travails could have on its legitimacy.

“Capitalizing on public grievances, mainly inflation, unemployment, and corruption, the old guard led by President Truong Tan Sang and Party Secretary General Nguyen Phu Trong has challenged Prime Minister Nguyen Tan Dung over the failure of his economic policies,” reported political risk consultancy Maplecroft, recently.

Despite the humble-sounding apology and internal Communist Party jostling, slowing growth and increasing public resentment at perceived government mismanagement and corruption has prompted the one-party Vietnamese government to intensify an ongoing clampdown on criticism.

Party control

"While Prime Minister Nguyen Tan Dung and President Truon Tan Sang represent competing political positions within the Communist Party of Vietnam, both prioritize party control above all else," says Christian Lewis of political risk consultancy EurasiaGroup.

On Oct. 30, the government jailed two songwriters in Ho Chi Minh City for alleged antigovernment propaganda, a vague catch-all accusation in a country where advocating for democracy can be deemed a crime. The sentencing comes soon after a Sept. 24 jailing of three well-known writers and journalists on similar charges.

Some dissident criticisms have focused on graft, a factor that is spooking investors and hitting growth, with Vietnam slipping in global league tables such as the World Economic Forum's Global Competitiveness Report, dropping 16 places from 2010 to 75th for 2012. Foreign investment into Vietnam peaked at just over $70 billion in 2008, but figures for 2012 to date show it at only $10.5 billion, a drop of 28 percent on 2011, according to the government.

Officials are worried that Vietnam will have trouble continuing to attract investors, and, perhaps in an effort to demonstrate a type of transparency they think the West wants to see, some are speaking more candidly than in the past about the challenges facing Vietnam's economy.

Vietnam's skills-base needs improving if the country is to continue to attract investors, with neighbors and challengers such as Myanmar and Indonesia offering lower-wages and bigger markets respectively, says Mai Thi Thu, director of the National Centre for Socio-Economic Information and Forecast, a think-tank at the country's Ministry of Planning and Investment.

“I know many investors come to Vietnam and face many difficulties to recruit appropriate labor,” she says.

For Vietnam, a failure to attract higher-tech investment and create better-paid, better-skilled jobs could mean becoming snared in the much-touted “middle income trap,” in which countries can no longer offer cheap labor because of rising costs but cannot compete with advanced economies in terms of skills or infrastructure.

“I don't think it can be easy for Vietnam to overcome this trap,” says Mai Thi Thu.

Nonetheless, she’s quick to point out that Vietnam's economy has come a long way since doi moi or “renovation” reforms introduced after 1986, when the country was one of the world's poorest, and officials in Vinh O are optimistic about the future.

“Five years ago we did not have the good road to here,” Nguyen Thi Hai points out, adding “and I think if you come back in five years time, you will see a very different place here again.”